The Buck Stops Here on Your Toughest Decision

Though outsiders can provide perspective on the choice of a successor, only the family leader can make the decision stick.

Léon Danco

At some point in their lives business owners have to close their eyes and start having a few new dreams. By age 40 or so, parents need to look around at their children and ask, “For whom am I building this business? Who will become my successors in time?” And if they truly dream that their children will one day own and manage the company, they must ask a corollary question, “How will I know which among them will make the best leaders for the future?”

The nice thing about monarchies is that children of the king are known as princes and princesses from the moment they are born. They’re expected to learn over time everything they need to know to fulfill their future roles, and these roles are clearly stated. The biggest failing of first-generation business owners is that they don’t realize that they will get old and have to turn over leadership of the company to a successor before the business starts to falter, and sale or liquidation becomes inevitable. In successor-generation businesses, the problem is exacerbated by the proliferation of shareholdings among siblings and cousins, all with spouses and all with strong ideas, rights, and advocates.

The qualities necessary for leadership—integrity, courage, vision, personal magnetism, commitment, compromise, and accommodation—usually em-erge early in life. By watching their children at play and at work, by seeing how they carry out assigned tasks at home and in school, by encouraging leaders in other fields to appraise their potential, parents can begin to sort out the talents and capa- bilities of the next generation. Between the age of 15, when children are almost adults, and 40, when they should be ready to take charge of the business, there are a total of only 300 months. Parents should use this precious time to observe their offspring and develop leaders. Unfortunately, too many parents do not begin the process until late in the game, when they are facing their own retirement—and all that entails—as well as the urgent need to choose a new leadership.

This indecision can lead to a variety of cop-outs. I have known of owners who have refused to choose a successor themselves and, instead, put the decision in the hands of their board. I have known of others who have simply walked away and let members of the next generation decide among themselves who will lead and who will follow. In both cases, the surrender of responsibility for the explosive succession issue risks a factional fight among the offspring and their spouses.

Even so eminent a management thinker as Peter Drucker maintains that family businesses best accomplish the job of picking a successor by entrusting it to an outsider who is “neither part of the family nor part of the business.” In a column in a Wall Street Journal column entitled “How to Save the Family Business” (Aug. 19, 1994), Drucker wrote: “Family-managed companies should try to find the right outside arbitrator long before the decision itself has to be made.”

I disagree. The job of choosing, training, and installing a qualified successor is the ultimate responsibility of the seniors in charge of the business. They can get all kinds of help in trying to make a wise choice. But only the family business leaders can make the final decision. And then it is their job to unify the family and build a community of agreement among siblings, cousins, spouses, and whomever.

Hiring a consultant—or asking others to get involved in the process of selecting a successor—can be be a handy way to duck the issues. Surely they can provide assistance and perspective, but no collection of outsiders alone can make the ultimate choices stick. The rest of the family, the management, and the other shareholders have to buy in, and only those family leaders who are most knowledgeable about what the business requires can persuade them to accept these choices.

New leaders, are not hard to spot. They are the kind of people that others flock to; they inspire eager followers. Take, for example, Edgar Bronfman Jr., the current CEO of Seagram’s. Edgar Jr. was a rebellious youth who participated in street demonstrations during the 1960s and after college plunged into a career in show business. His brother, Sam, followed in the footsteps of their father, Edgar Sr., and entered the family liquor business. When Edgar Jr. finally joined the company at his father’s invitation, however, it was clear which of the brothers was the leader. As one Seagram’s insider noted: “When the two brothers entered a room, Sam would walk around greeting everybody, very friendly, but Edgar retreated into a corner and let everyone come to him.”

Can there be two or three leaders in the same business? Of course, yes. When there are more or less equally talented siblings, no parent in his or her right mind is going to make this into a zero sum game. Perhaps Brother A can be chairman and Brother B, president; I know of many companies in which two brothers and their wives have been very content with this arrangement. Perhaps the company can be reorganized into independent units of a holding company, with review and direction by an outside board. There are always creative solutions, so long as people are willing to cooperate, and grandiose egos don’t get in the way.

In second- and third-generation family businesses, the ultimate choice becomes more difficult because usually more than one branch of the family is involved. Few parents are willing to admit, “My brother’s kids are better than my kids and should be the leaders.”

If there is any doubt about whose kids should lead, the candidates should be tested through experience. They should have had managerial jobs both inside and outside the company that clearly allowed them to succeed or fail. Review by outsiders is, as I’ve always said, invaluable in such situations. Unfortunately, long-term board members are hesitant to offer a candid opinion on the qualifications of successors. They are reluctant to offend the family. When asked their opinion about the candidates, they too often offer a lame, “They’re coming along great.” Other board members, especially those who are there as window dressing, are simply spectators to the process. They may have met the candidates casually or at shareholder meetings, but haven’t spent much time getting to know or evaluating them.

Both kinds of board members don’t seem to realize that measuring successors is part of their responsibility as directors of a family firm. When their viewpoint is specifically requested, they will, I hope, be willing to spend some time getting to know the candidates and forming an opinion.

Still, the final choice must be made by the senior leaders. While business owners cannot always be objective about their own children, they must at least be responsible in how they reach decisions about those who will be entrusted with the business. Too many go to great lengths to avoid making a choice, either because they can’t bring themselves to elevate one offspring above another or because none of the kids are capable of doing the job and the parents cannot face the truth. Instead, they turn to outsiders to make the choice, hoping someone will tell them that one of the kids really is a leader.

Léon Danco is the founder of the Center for Family Business in Cleveland and the author of four books on family business.